State budget – why rising interest rates will not overthrow Greece for the time being

At 193 percent of its economic output, Greece still has the highest debt mountain of all eurozone countries. Some fear that if interest rates rise, it could become a problem. But it will not be, say many Greece connoisseurs and also the German Finance Minister Christian Lindner (FDP), who otherwise in fact on every occasion stresses that the debt in Europe must go down.

In the short term, there is no need to worry, Lindner says. He points to the structure of Greek debt, which has changed markedly in recent years.

“The fact that the very high government debt must be able to be financed even with rising interest rates is primarily due to the assistance provided by the international community,” explains Jörg Kramer, chief economist at Commerzbank. “For example, more than 60 percent of Greek government debt is owned by public creditors outside Greece. In addition, the loans have a fixed interest rate and a very long maturity of 18.2 years on average.” Only about 26 percent would fall due within the next five years. “Refinancing government debt is only slightly more expensive due to higher interest rates.”

Inflation reduces the debt burden

The Greek expert Alexander Kritikos from the German Institute for Economic Research came to the same conclusion. A large part of the Greek debt is even laid out for 50 years until 2070. “It ensures some calm. Therefore, the risk is currently limited, also because the economy is developing quite positively.”

The European Central Bank (ECB) wants to raise interest rates again in July – for the first time since 2011. It will probably put pressure on countries that will soon have to refinance large parts of their bonds. In Greece, the level of debt has also risen sharply during the pandemic, but the country must – forced by its lenders – usually manage without a primary deficit, ie present a balanced budget before interest is paid. It works because the European Corona Reconstruction Fund is still available for large investments, Kritikos says. Inflation, which is currently around eight percent, is important. “Of course, it helps heavily indebted countries because it reduces the real debt burden. However, high inflation may also necessitate help for poorer sections of the population, which in turn may lead to new borrowing, which Greece actually wants to avoid.” Then higher ECB interest rates may still have a negative impact.

Commerzbank economist Krämer says 2022 is still a special year. “A budget surplus is already planned before deducting interest payments in the coming year. Here, it helps that the Greek economy has found its way back on the growth track. In the meantime, the corona-related downturn has been more than offset.” Despite all the problems, economic growth of more than three percent can still be expected in 2022. Domestic consumption had recently proved to be a support. Experts expect a boost in tourism from the spring.

risk premiums increase

In the financial markets, the differences between Germany (benchmark) and heavily indebted southern European countries have recently widened again. Example Greece: At the height of the sovereign debt crisis in March 2012, the spreads on ten-year Greek government bonds compared to comparable German government bonds had reached a record high of just over 32 percentage points. In the years that followed, however, the so-called spreads fell steadily until they reached their lowest record of less than one percentage point in the summer of 2021, thanks to the ECB’s securities purchases to combat the consequences of the pandemic. Since then, risk premiums have risen to around three percentage points due to rising inflation and the expected interest rate hikes. Lindner, who visited the Greek capital Athens a few days ago as the first German finance minister since 2014, says it could become a problem over time. Therefore, the goal must be to reduce the debt and make it sustainable in the long run.

The EU ends monitoring

But for the first time since its debt crisis, Greece no longer needs to be monitored more closely by the European Commission. On Thursday, eurozone finance and economics ministers voted to phase out the previous regulation, as Greece had successfully implemented most of the necessary reforms. Since 2018, Athens has stood on its own two feet financially. Now there is great joy that the EU will hardly renew its monitoring in August. The European Commission still has to give its formal approval, but it is taken for granted.

His country is no longer “Europe’s black sheep,” said Prime Minister Kyriakos Mitsotakis. Greece has survived the capital restrictions and has recently repaid the last loans from the International Monetary Fund. “This completes a painful cycle that began twelve years ago.” (Reuters)

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